Money and Ideas

The current global financial crisis is difficult for small firms. Small firms face contraction of credit from banks, which affects their future investments adversely. On the equity angle, there is a general lack of trust from investors due to increasing uncertainties every day. Therefore, investment in future projects using either debt or equity becomes difficult for small businesses in general.

While small firms face these difficulties, the New York Times (Flanigan, 2008) recently reported that entrepreneurs with innovative ideas and technologies do not face a funding gap even during the current crisis. There seems to be some hope among investors on the potential of innovations and the individuals who bring these to the market. One entrepreneur stated that in this crisis “companies cant raise debt so there are opportunities for equity investment.” This investment, in his opinion, will be in areas where new technologies are constantly evolving. In short, the New York Times calls it the “entrepreneurial edge,” which involves the innovative idea and the individual.

A number of studies (Gulbrandsen, 2004; Giuri et al., 2007; Meyer, 2005; Azoulay et al., 2007; Baldini et al., 2007; Bercovitz & Feldman, 2008) have recently paid attention to the roles of individual inventors in the university-industry technology transfer or academic entrepreneurship. In line with these recent developments, this research aims to focus on three factors of interest; namely, scientists’ internal factors (e.g., human and scientific capital), external factors (directors – research group leader behavior, spin-offs at the institute), and psychological factors (perceptions, motivations). Within the scope of this paper we specifically focus on the relationship between the likelihood of scientists’ patenting and inventing behaviors and their perception and presumptions on the benefits (measured in terms of financial benefits and/or scientific reputation) of commercial activities. We control for different socio-demographic as well as institutional factors and scientific fields in our analysis.

A large share of small business failures is attributed to financial structure mismanagement. Most of our knowledge on financial structure of small firms is from the streams of financial access and capital structure. The implications from capital structure stream are threefold: (1) small firms are more debt based, (2) small firms tend to bootstrap their finances, and (3) small firms are more credit rationed. Beyond that it is well known in capital structure1 research that owner, firm, and industry characteristics are important for these results. In the stream of financial access, research from the policy angle has been toward financial institution availability, rules and regulations, time for application, etc. The emphasis in this stream is mainly on banks and borrowers. The central message is that small borrowers have many problems in the access front mainly in developing economies. Until recently, these two research streams have been distinct from each other. Faulkender and Petersen (2006) unite these two in an effort to show that supply of capital is as important as demand for capital in determining capital structure choice of firms. It is still an open issue whether this result is applicable to small firms.

Geography of firm finance is mostly a black-box in economic geography as well as finance literature. This paper contributes by empirically testing for the effect of regional presence of lending institutions on different financing options utilized by SMEs. Not just utilization but how these are combined by SMEs is also analyzed. To do so, we introduce a modified measure of lending operational distance, which we call the “Commercial Operational Distance.” This measure is calculated for both local as well as national lending institutions. Overall, we perform the analysis for two levels: rural and urban. The central question that we address is: how does regional commercial operational distance affect the usage and combination of finances.

While one strand of research views corruption as a boost to economic growth (e.g., Leff, 1964), the other views it as a hindrance (e.g., Mauro, 1995). Most of the “hindrance” literature relies on the linkage of corruption to growth through its affect on investment.Méon and Sekkat (2005) find that corruption affects growth independently from its impact on investment in economies where there are weak governance structures. There is a need therefore in this context to study channels of economic growth that are affected by corruption. This paper deals with one such channel, namely innovative activity. This paper is the first in a way that it tries to merge two distinct fields of economics of innovation and public choice.

Innovation is considered crucial for economic growth (mainly from the technology-gap approach, see Fagerberg, 1994). Innovative activities might get affected by corruption due to lack of resources or lack of trust in institutions. A related view is suggested by Shleifer and Vishny (1993) that corrupt firms would often report having advanced technologies, even though they are not needed necessarily. This would mean that the amount of innovative activity seems large only due to the presence of corruption. This issue is of utmost importance in the context of less developed countries (LDCs) that have to cope with socio-political-economic instabilities and bureaucratic pressures and yet at the same time have to keep up with economic growth.